MOORLACH UPDATE — Pythons’ Tightening Grips — July 15, 2014

The editorial board of the OC Register opined in opposition to the contract bargained between the County and the Association of Orange County Deputy Sheriffs (AOCDS). Unfortunately, it did not change the outcome of the Board’s vote today. It was not unanimous in closed session and it saw Chair Nelson and myself voting in opposition in public.

Increased salaries will mean increased pension liabilities. Increased pension liabilities will mean increased annual pension plan contributions. Increased pension plan contributions will further restrict an already overly-choked County budget. It’s a tough conundrum when someone wants a massive pension increase and then complains about not receiving raises. But, you can’t shame the Board, after it granted the pension enhancement in 2001, for more raises. And you can’t complain that you are being treated differently than other employee bargaining units with retiree medical withholdings when your plan is very different than that of those other bargaining units. Wordsmithing will only go so far. Someday someone will have to pay the piper. Future Boards of Supervisors will have to deal with these two unfunded pythons as their liabilities continue to tighten their fiscal grip on the County’s budget.

There are no easy answers. If there were, someone in this country would have proposed and implemented it. For me, I see only one ultimate solution and I laid it out in MOORLACH UPDATE — San Diego U-T — October 13, 2013. Here is some of what I wrote:

Modifying down pension formulas is the prudent approach to pursue. Employees would be assured a reasonable pension. It may not be the “formula on steroids” they recently negotiated, but the modified formulas were still very generous equations compared to any private-sector retirement plan, and certainly compared to Social Security. Such a change would preserve the defined-benefit pension model and avoid the obvious cry to freeze plans and convert wholesale to defined-contribution models similar to the 401(k) retirement approach of many Fortune 500 employers.

Although it is often framed as an all-or-nothing issue, from a rational perspective California’s public employees should be willing to take the initiative to moderate their pension formulas, knowing that they could possibly lose a significant percentage of benefits if municipalities start declaring bankruptcy. Low-funded defined-benefit pension plans are exposed to the risk of eventually paying out a much lower benefit, one that can be afforded over time, versus what was actually promised.

Some airline pilots of now-bankrupt carriers are receiving 40 percent of their formerly promised annual benefits. This scenario is bound to be duplicated in the public sector as taxpayers reach a tipping point and refuse to pay more and more for equal or reduced service levels. In fact, certain retirees of Central Falls, Rhode Island, recently agreed to pension reductions of 50 percent as a resolution of that city’s bankruptcy filing.

With the recent filing for Chapter 9 bankruptcy by the cities of Detroit, Stockton, and San Bernardino, the inference that pensions are untouchable will be questioned.

A federal bankruptcy judge may just approve [this] solution in a plan of adjustment to allow one or more of these cities to exit Chapter 9 with the debt relief they need to survive financially. This may change the pension paradigm for municipalities around the entire country. This is the joy of federal bankruptcy court, where any contract, including pensions protected by state law, can be impaired by a federal judge. It is no wonder that the bankruptcy judge overseeing Detroit’s filing has demanded that a creditor committee representing the city’s more than 23,000 retirees be established as soon as possible.

Something will happen to the pensions of current and retired employees. It behooves public employee bargaining units around the nation to get in front of this imminent shift. They should negotiate a rescission now that is acceptable to their current and past membership, but also affordable to the taxpayers who foot the bill.

No one likes being forced to give back a gift. But, by being stubborn, bargaining units run the risk of seeing their pension drastically reduced with little or no input if their employer pursues Chapter 9 to obtain the results that these three cities are about to achieve.

It’s time for everyone to admit that recent pension enhancements, generated from an unachievable expectation created by the dot-com boom of the late 1990s, are no longer fiscally prudent. The direct beneficiaries need to take ownership and set a course to correct it. If city and county employees take the appropriate leadership role, fiscal calamity can be avoided and they will have saved their cities and counties, and their pensions.

Judge Klein, the Federal Bankruptcy Judge handling the Stockton Chapter 9 bankruptcy, stated last week that pension plans are touchable. His legal interpretation and ruling are due in the fall. I have that sense that the County of Orange is slowly walking further out into a frozen lake, where the ice is getting thinner and thinner. It’s difficult to watch, as you would rather that it were moving back towards the shore. I hope that the OC stays fiscally viable in the coming decades, but I don’t envy my successors as they deal with the ramifications of the votes made in 2001 and 2004 and today.

Editorial: Deputies’ contract unfair

Union wins exclusive concessions from O.C.

If any lesson should have been learned from the financial fallout for local governments in the last recession, it is that making big promises to public employees can have big consequences. That lesson doesn’t seem to have stuck, though, by the looks of a proposed contract with the Orange County deputy sheriff’s union.

The contract, set for a vote today by the Board of Supervisors, has several worrisome concessions, but a handful are more glaring than the rest. One, in particular, looks to offset a required increase in pension contributions through salary and other compensation increases.

That is a uniquely generous concession not given to other county employee unions during current negotiations. Those other groups have been asked to pay their full share – some agreed and some had it imposed on them. Even the supervisors are picking up their full contribution under new rules.

It is essentially a pay raise that will contribute to the overall payout retiring public safety employees can draw from their pensions. Increasing the county’s pension liability – now more than $5 billion – as budgets remain fairly stagnant, simply isn’t prudent.

The problem is compounded by calls to create two new salary tiers at the top. Supervisor John Moorlach told us that about 77 percent of the union’s membership is in the top wage tier. This amounts to another pay raise that, coupled with the pension offset and an increased county contribution into the union’s retiree medical plan by more than half, add up. Mr. Moorlach said, in all, some employees could be looking at up to 10.5 percent in raises.

Supporters say public safety should hold a special place in the county budget, as the dangers inherent in the job warrant special consideration, and recruitment efforts will suffer unless the department remains competitive. But comparing ballooning public safety budgets with one another creates an endless upward cycle.

Further, while no one can argue that risk and responsibility come with the uniform, serving the community is at the core of the job. This deal is not in the best interest of the community.

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